What is Collusion in a Corporate Setting?

What is Collusion in a Corporate Setting?

One of the worst things a director sitting on a board of directors may encounter is a derivative lawsuit from stockholders seeking to hold the board personally liable for some misdeed. It can cause a company to lose stockholder faith, it can cost millions of dollars in legal fees, and it can even eventually destroy a company or director financially. Therefore, the rules for holding directors accountable under Delaware law typically favor the directors.

A somewhat common approach to suing directors is through the theory of collusion between a director and some regulator. This is a lawsuit where a group of stockholders join together and claim that a regulator was corrupted by the director, therefore causing damage to a company, or violating the laws in some other way that caused damage to the stockholders. In cases like these, the stockholders in a derivative lawsuit must prove actual collusion between the director and the regulator.

Collusion under Delaware Law

 A recent case out of the Delaware Supreme Court better defined what “collusion” means in this context. This is an important decision for corporations across the country, including California, because many corporations are headquartered in Delaware, and many courts look to the Delaware judiciary as setting corporate legal policies for the country.

In the recent case, City of Birmingham Retirement and Relief System v. Good, the court upheld a lower court ruling that dismissed a derivative suit against the board of directors of a North Carolina energy company. The case began when that energy company had a pipe burst under the ground, seeping contaminated water into the ground, local water systems, and causing an environmental hazard.

The result of the spill caused the company to lose over a hundred million dollars in fines, clean-up costs, fees, and more, all of which affected stockholders. Some of those stockholders banded together to say that it could have been prevented if the directors had not been colluding with the corrupt regulators who allowed this spill to happen.

Court Upholds Dismissal

The case was dismissed by the lower court because of the high standard that stockholders must meet in order for a derivative suit to make it in court. The court ruled that in order for the suit to continue in court, the stockholders had to show with specificity that the directors knew the regulators were corrupt, and that they colluded with them to break some environmental law. This is an important case for both directors and stockholders going forward.

In most cases, the directors themselves are responsible for suing the company if some law is broken, whereas the shareholders generally appeal to the directors to request relief. To take it a step further and sue the directors and hold them accountable is one of the more difficult legal theories to prove, but it can be devastating to a company and its directors if it is successful.

California Corporate and Business Law Professionals

 At the Royse Law Firm, we are dedicated to serving companies of all sizes, whether headquartered in Delaware, California, or somewhere else. We look forward to helping your company with its legal needs. Contact us today.

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